Having worked with or for online lenders for the better part of a decade, I know firsthand how difficult it is to remain competitive in an ever-growing marketplace. Cost of funds remains high from upmarket lenders and margins are thinning by the day. Yet consumers and small business borrowers are demanding faster underwriting and quicker speed to funding, and investors continue to demand record-breaking quarterly loan volume.
How are online lenders keeping their heads above water? They are getting creative.
In recent years, Kabbage and others have stepped up to introduce a purchasing card product to their borrowers, and with their early success, many lenders are now following suit for the following four reasons:
1. Staying on top of the customer's mind
Point-of-sale lenders (lenders who offer a loan at the checkout aisle of the store) are starting to look for new ways to reach the consumer directly and at more than one location. It follows naturally that several lenders are working to roll out a card product for this very reason.
In the small business lending space, Kabbage decided to offer an actual card product to their borrowers to receive loan disbursements, not just putting the company on a customer's mind, but literally in their wallet as well. As borrowers began to think of Kabbage as their lending source for making purchases, they turned to the brand more often for financing needs. In fact, utilization has increased markedly with those borrowers who have chosen to receive a card.
2. Speaking the language of large corporate partner targets
For point-of-sale lenders, the key is to secure and maintain as many retailers as possible to serve as salespeople for the lender. While many lenders begin with the local retailers in their backyard, most aspire to land a big-box retail account like GreenSky secured Home Depot and Affirm secured Experian. This changes the game for an online lender in terms of revenue but carries with it complicated requirements from the retailer.
Large retailers are not accustomed to receiving funds from a lender via Automated Clearing House (ACH), the leading method for moving money between lenders, borrowers and merchants. These retailers demand that all partners have the ability to pay them in real time and via the same credit card “rails,” or payment method, as they receive all other funds.
“Lenders are looking for ways to improve their bottom line while at the same time improving their borrower’s experience,” explains Omri Dahan, Chief Revenue Officer at Marqeta, a processor of cards for online lenders who announced a partnership with Visa last week. “Whether a small business or point of sale lender, a Marqeta payment card meets both objectives. We continue to focus on online lending to offer our customers the tools they need to stay ahead of the market.”
Introducing a card product -- whether plastic, virtual or via digital wallets -- allows the lender to send loan funds in real time for goods or services, just as if the purchase was with any other card and without the labor of integrating completely with the retailer’s Point-of-Sale infrastructure.
3. Underwriting use of funds
When lenders make a loan, they are often highly limited in seeing how those loan proceeds are spent. Even with technology integrations with the borrower’s bank account, the lender can only see in-flow and outflow of cash from that bank account, but even this data cannot be tied directly to the loan funds that were distributed. This makes it difficult to ensure that loan funds are being used for their intended purpose.
For small business lenders, use of funds is a very important data point in the underwriting process. Offering a loan for inventory, for instance, is much lower risk than offering financing for marketing, as the inventory can be sold, if necessary, and redeemed for value to the lender. Therefore, many lenders are not willing to offer financing for certain uses. Unfortunately, many borrowers have learned this, through applying for multiple loans, and are even sometimes coached by brokers to lie about use of funds, knowing that the lender is none the wiser.
“Kabbage as a company couldn't have existed ten years ago because we didn't have access to the data in real time that we use to help our customers get access to capital,” explained COO Kathryn Petralia. “Using APIs our customers share with us to run their business, from processing data to checking account data, we can make rapid decisions to offer our line of credit product.”
Small business lenders have now begun to use card products to understand the exact spend that is tied to their loan. This helps the lender determine whether the borrower is an accurate risk profile for future loans, and does so in a way that the borrower cannot “fudge the numbers.”
Related: Five Ways to Build Business Credit
4. Revenue sharing
Ultimately, online lenders are looking for the most attractive way to smooth out their revenue growth curve but cannot do so at the cost of their borrower. This limits the lender from gaining meaningful ground without either finding lower cost of funds or finding more customers (either through new products or new customer acquisition methods).
Cards are quickly entering business plans of lenders because of the new revenue stream they produce for the lender. By offering a card to borrowers, lenders are now able to share in interchange. This can generate incremental revenue for the lender, and in a game where every basis point counts, they are paying attention.
With the crowded and murky competitive landscape in online lending, coupled with the need for lenders to grow quickly, innovations in delivery methods are gaining meaningful ground. Payment cards are now part of the solution.